Real Estate, Hospitality & Construction

The UK economy – around the sixth largest globally – is one of the most open, and remains a highly attractive destination for both domestic and foreign direct investment. As a result, the real estate, hospitality and construction markets have received significant capital in recent years.

Additionally, London’s standing as a global financial centre has helped it remain one of the world’s leading cities with a real estate investment market to match.

Investment activity outside Central London has also been increasing. Transaction volumes continue to recover, with the strength and depth of investor demand supporting pricing.

The UK’s economic outlook has improved through 2014, and better prospects for 2015 are expected to help sustain recovery in many of its real estate occupier markets. Challenges remain though, from acquiring appropriately priced properties to complying with the increasing regulation created by the global economic crisis.

Our Real Estate, Hospitality and Construction team works to anticipate market trends, identify their implications, and develop points of view on industry issues to help you capitalise on new opportunities, redefining what you thought possible.

Buildings account for 43% of the UK’s carbon emissions? Property companies are therefore a major source of carbon emissions – but they are also a major part of the solution.

Building regulations now require buildings to be much more energy efficient. Indeed, by April 2018 it will be illegal for a commercial property company to rent out a building which has an energy efficiency rating lower than E.

There is therefore a commercial, regulatory and moral imperative for property companies to improve the energy efficiency of their assets and communicate this to investors.

Integrated reporting is a significant evolution in corporate reporting and an ideal mechanism to communicate this because it focuses on explaining how an organisation creates sustainable value.

It provides a broader perspective on ‘value’ than statutory financial statements alone, connecting the different ‘capital’ sources an organisation draws on to create a sustainable commercial return.

An Integrated Report for a property company would draw a meaningful connection between its sustainability strategy and business performance, providing investors and other stakeholders with material and concise information about how it creates sustainable value.

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With a new CEO and corporate strategy, The Crown Estate embarked on an ambitious project to publish a world-class Integrated Report – the first of its kind in the UK. And we have been working with them throughout this journey.

Integrated reporting represents a significant evolution in corporate reporting, and allows The Crown Estate to communicate its business strategy, performance and prospects in a concise and comprehensive way.

This year’s report – the second in a three-year programme – also shows the link between the resources and relationships that sustain the business and how The Crown Estate contributes to the wider environment through its business activities.

Not only have we supported The Crown Estate in identifying the issues that will drive future business performance but we have also helped it create a world-class Integrated Report and receive market recognition for being pioneers in integrated reporting. But don’t just take our word for it: Our competitor, PwC, awarded the first AND second reports its prestigious Building Public Trust awards. The Crown Estate’s 2014 Integrated Report has also recently won ICAEW’s Finance for the Future award.

By helping The Crown Estate to think more holistically about its performance, EY has also played a valuable role in contributing to a more sustainable economy.

2013 was a great year for IPOs in our sector, with 150 of the 837 global IPOs (or 17.9%) coming from real estate, hospitality or construction companies. Whilst 2014 was not quite so strong, it did not disappoint with a total of $30.bn being raised in the Real Estate sector alone.

With the improving business climate and strengthening underlying assets, we expect this trend to continue, with companies looking to raise new capital and take advantage of anticipated further gains.

The IPO value journey

We can help you evaluate your options and guide you throughout the IPO process, including working through challenging accounting and tax issues. Although the IPO event itself generally lasts 90 to 120 days, the IPO value journey begins at least a year or two before the IPO and continues well beyond it.

The IPO journey is not easy, but with the right people and careful planning, real estate companies can navigate the long road from private to public ownership.

It remains a safe haven for investors and a global real estate centre. London is in the perfect time zone for global investment, has strong fundamentals (eg, rule of law, tax haven for inward investment, political stability), and an excellent education system, and its status as a “go to” global city for young talent makes it attractive for inbound investors.

London is experiencing huge levels of investment, including massive ongoing development following the 2012 Olympic Games, the £15 billion (US$23 billion) Crossrail project to link east and west London, and recent regulatory relaxation relating to the planning and provision of social housing has been framed to trigger further real estate activity.

EY knows London. Our team has advised on the top deals in the capital, including the sale of Battersea Power Station, for which we won Property Week’s Deal of Year 2013.

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Our real estate deals build value. No one knows better than EY how to turn property into pounds.

In 2012 we advised on the sale of the landmark Battersea Power Station site. The deal was landmark too.

After several attempted off-market sales by the owner, EY launched an international marketing campaign that achieved a fantastic result. Although many thought it unlikely, if not impossible, we generated a number of highly credible bids for this apparent “white elephant” from across the globe. This resulted in a sale to a consortium of Malaysian investors headed by SP Setia – its first investment into the UK.

The sale, at £400m, provided our client with a significant return and exceeded both its own and the market's expectations.

Not only do we believe that this was a spectacular achievement, the real estate industry agreed and named this as Property Week Deal of the Year and Property Week Resi Deal of the year 2013.

The private equity real estate sector has nearly $221bn of capital worldwide available for investment into real estate markets, and the RE fund sector stands to continue achieving steady growth via new investor relationships, new partnerships and expansion into new geographic markets.

Yet, investors continue to make increasing demands from the RE fund managers they place capital with, and it has been a significant challenge for many to readily respond to all requests. This has particularly been the case with small and midsize players who continue to face a tough fund-raising environment.

There is also a substantial amount of global capital chasing real estate investment opportunities, and we expect this to continue, which will fuel top-level pricing in the global gateway cities and push more investors into the opportunistic and value-added space in other markets. This should bode well for the broader real estate industry.

What’s more, industry players have moved carefully along the risk spectrum in this cycle, which is why we have not seen an excessive amount of development activity or movement in secondary and tertiary markets that lack the economic drivers that justify speculative development.

Our service is driven from London where our team of professionals are able to draw upon the knowledge and skills we have in all our major European and global real estate practices. This ensures service of the highest quality tailored to your specific needs and locations.

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Although funds and institutions appear to be sticking to their core strategies, the capital available for investment exceeds the quantity of current market opportunities. Some participants, notably closed-ended funds, will be under particular pressure to get their capital invested.

It seems inevitable that, in the drive to invest and generate returns, we will start to see “style drift” in the market. Investors, in their urgent pursuit of yield may be led too far from their core zones of expertise and make bets on less tried and tested, higher risk assets. If this does happen, then we predict that the future for the sector may not be so different from the past.

This is where we can help. Our team will work with you to really understand the needs of you and your stakeholders, advising you not only on the best terms for a deal, but also challenging your investment decisions to ensure you are making the right deals for your long- and short-term strategy and goals.

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At EY, we believe one positive result of the recession is the increased professionalism we are seeing within many real estate players.

As real estate is now increasingly competing with mainstream asset classes, there is extra pressure for enhanced reporting processes, with more relevant information needing to be reported more frequently. New industry entrants, particularly hedge funds, are helping drive better reporting standards and methods.

The Alternative Investment Fund Managers Directive (AIFMD) is having an impact, creating a set of harmonised rules for the management and marketing of alternative investment funds in Europe, including non-listed real estate funds. There is an increasing push for reporting on a fund’s quantitative risk profile, alongside reporting of qualitative risks.

Back office finance functions have increasingly transformed their processes to meet the needs of dealmakers and investors.

Ongoing professionalisation is likely to result in a different type of reporting that measures a real estate business’ true enterprise value. The development of integrated reporting (see Communicating to investors) is an example of this.

Today’s market is more regulated than in the past, and likely to become more so.

Some will see this as a negative factor that simply drives up costs, however we welcome sound regulation, and can work with you to ensure you are not only meeting your legal obligations, but are also able to use the regulation to your advantage, and bring value to your investors and stakeholders.

The EY ITEM Club is the only non-governmental forecasting group to use HM Treasury's model of the UK economy. Our reports provide a detailed analysis and forecast of economic activity and are independent of any political, economic or business bias.

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.